My daughter graduated from undergraduate school in May of this
year. As far as student loans were concerned she was considered a
dependent for the 4 years she attended there and we filed our income
tax as such. However, she started graduate school in July of this
year and in order to attend she had to apply for a student loan as an
independent. My question is since she was considered a dependent for
the first half of the year and an independent for the second half, can
or should we claim her on this year’s income tax returns as a
dependent and if so would this affect her loan for graduate school in
any way?
— Donna W.

Dependency status on federal income tax returns and on the Free
Application for Federal Student Aid (FAFSA) are not
related. Claiming a student as a dependent on the parent’s federal
income tax return generally does not affect the student’s eligibility
for financial aid.

Dependency status on IRS Form 1040 is specified by the
Internal Revenue Code of 1986 [26 USC 152]. Dependency status on the
FAFSA is specified by Section 480(d) of the Higher Education Act of
1965 [20 USC 1087vv(d)]. These laws are different and have different
definitions of the term dependent, although there are some similarities.

Chapter 3 of IRS Publication 17
describes the criteria for a child to be considered a dependent on
the parent’s income tax return.
Generally, a child must be under age 19 or a full-time student for at
least 5 months during the year to be considered a dependent for
federal income tax purposes. The child must have lived with the
taxpayer for more than half the year, notwithstanding any temporary
absences for illness, education, business, vacation or military service.
The child must not have provided more than half of his or her own
support. (Note that scholarships do not count when determining how
much support was provided by the child.) Multiple support agreements
allow divorced parents to decide which parent can claim the child as a
dependent.

To be considered a dependent for federal student aid purposes, the
child must not be an independent student. A graduate student is
automatically considered an independent student. (A student will also
be considered independent if he or she is over age 24 as of December
31 of the award year, is married, has dependents other than a spouse,
is a veteran or on active duty in the Armed Forces, or is an orphan or
satisfies certain other criteria.) If a child is not an independent
student, the parent must also have provided more than half of the
child’s support. The definition of support for the FAFSA differs
slightly than the definition used by the IRS. The child does not have
to live with the parent to be considered a dependent on the FAFSA.

Thus a graduate student may be claimed as a dependent on the parent’s
federal income tax return if the student satisfies the IRS rules for a
qualifying child without affecting the student’s status as an
independent student for federal student aid purposes. The graduate
student is independent on the FAFSA because she’s a graduate student,
regardless of whether the parent supports her or not.

Likewise, whether the child was a dependent student for part of the
year and an independent student for the rest of the year has no impact
on whether the parent can claim the child as an exemption on the
parent’s federal income tax returns. It is irrelevant. The dependency
status for federal student aid purposes and the dependency status for
federal income tax purposes are separate, unrelated concepts.

Note that if a parent claims a graduate student as a dependent on the
parent’s federal income tax returns, it may affect the student’s
ability to claim certain tax benefits on her own federal income tax
return. For example, students who are claimed as an exemption on
someone else’s federal income tax return are not eligible for the
student loan interest deduction.